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Dell Upbeat on Q4 Potential, Q3 Profits Fall 54%

Dell executives say they expect business sales of Windows 7 PCs to boost sales in the company's fiscal fourth quarter, while reporting that third-quarter revenue fell 54 percent from a year ago. However, one analyst predicts that a PC price war will break out as Dell moves aggressively to take market share away from major competitors such as Hewlett-Packard and Lenovo.

Dell reported fiscal third-quarter 2010 revenue of $12.9 billion, a slim sequential improvement over second-quarter revenue of $12.8 billion. However, it reported that third-quarter net income was $337 million, a substantial drop from the $727 million it earned in same quarter a year earlier.

Brian Gladden, Dell's chief financial officer, said during the Nov. 19 earnings conference call that the quarter's results were "showing some encouraging signs for us, especially in our large enterprise and SMB businesses, where we had sequential growth for the first time in seven quarters."

Large enterprise revenue was $3.4 billion, up 4 percent from the second quarter, though down 23 percent from a year ago, and small and midsize business revenue was $3 billion, up 5 percent sequentially, although down 19 percent year over year. Consumer revenue was $2.8 billion, which was consistent with the previous quarter, though down 10 percent from a year earlier.

Driven, in part, by Microsoft's launch of Windows 7 on Oct. 22, Gladden said he expects Dell to continue to see growth in the fourth quarter. "We built more backlog than normal due to [Windows 7's] late-quarter release, and the order dynamics that we saw during the end of October," Gladden said. He explained that customers "were waiting to see how the launch went. We built a little backlog as a result, and we'll ship that in the fourth quarter."

Further reading

He added that while in the past he's used the word "stabilizing" to describe the current computer industry business cycle, Dell is now seeing "positive signs that growth is coming back."

Michael Dell, the company's chairman and CEO, agreed in a statement. "We are seeing improvement in overall underlying IT demand that is continuing into the fourth quarter. The same is true with momentum in Dell's business, specifically in our Large Enterprise and SMB segments," the statement said.

Gladden emphasized that over the past four quarters the company has increased cash flow, while cutting costs, a move he called a "never-ending process to drive to cost leadership."

Gladden additionally repeated that the majority of Dell's business products are business-to-business, and that the current difficult economy is now primarily being driven by consumer demand. Both executives said during the call that in the coming year they expect enterprises to begin refreshing older models with PCs running Windows 7.

John Spooner, an analyst with Technology Business Research, commented in a statement on Dell's earnings that TBR expects Dell's return to aggressive market-share growth in 2010 to spark a PC price war as businesses begin replacing PCs.

"We believe Dell has been laying the groundwork for this move for some time. In fact, it will leverage its lower costs to provide aggressive hardware pricing to large enterprise customers in order to win in large bid situations. At the same time, Dell will gain the opportunity to attach additional items, including its storage and newly acquired Dell/Perot Systems services, with large PC and server deployments."

Spooner wrote that TBR expects Dell to leverage its bundle of capabilities, including software, storage and services, to increase the profitability of each sale. "TBR believes Dell is moving in this direction because it believes that the pipeline of opportunity is very strong now, and will continue to build along with the improving economic situation throughout the world," he said.

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